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What VCs See In Real Estate Crowdfunding Platforms
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editorial

What VCs See In Real Estate Crowdfunding Platforms

News broke yesterday that RealtyShares raised a $1.9 million seed round led by VC firm General Catalyst. This was a continuation of a trend that we’ve seen over the past several weeks, with a number of VCs announcing their investments in real estate crowdfunding platforms. 

The most prolific example of this is the $9 million Canaan Partners gave to Realty Mogul at the end of last month. But other platforms are attracting investor money, too, as this Entrepreneur article shows, with RealCrowd and Groundfloor also getting funded.

To be clear, these platforms are, at least for now, only serving accredited investors; the unaccredited are barred from investing until the SEC finalizes JOBS Act Title III regulations. Accredited investors are those individuals whose net worth (or joint net worth with a spouse) exceeds $1 million, excluding primary residence; or those who had an income of over $200,000 ($300,000 with a spouse) in each of the last two years.

Recent numbers released by Crowdnetic confirmed what the funding announcements had been suggesting. Real estate is the top industry in terms of committed capital, according to its CrowdWatch listing service, indicating a high level of interest among investors. That’s certainly good news for those VCs who have been investing in real estate crowdfunding platforms.

The aforementioned Canaan Partners made the biggest investment of its peers, and it believes that the gamble will pay off in a big way down the road. The VC firm has been in business for over 25 years, focusing primarily on tech startups. It was one of the earliest supporters of crowdfunding, having invested in LendingClub back in 2007. It has also invested in CircleUp, a platform focused on consumer products.

Hrach Simonian is a principal at Canaan and sits on Realty Mogul’s board. (He also sits on the board of CompStak, a crowdsourced real estate data aggregation company; perhaps there’s room for collaboration between the two?) He looked at a number of crowdfunding opportunities prior to Realty Mogul, but none of those impressed him.

“[Those] guys had gone after a different approach than what Realty Mogul had taken,” he told Crowdsourcing.org. “Their approach was, ‘Let’s just put the technology, [the] SaaS platform, out there, and these real estate developers and sponsors will just pick it up and use it to go crowdfund for the deals they’re doing, we’ll just charge a technology licensing fee.’”

“The problem is that the technology is part of the solution here, but it’s not the whole solution,” he continued. “You need to attract both sides of the marketplace, the sponsors… and the investors, on the other side. You need to be a market maker.”

Simonian said one of the major things the VC firm looks at when considering a deal is the market that a startup is in: is it big enough, and is the timing right?

In terms of the market size, real estate is clearly a huge sector, worth an estimated $11 trillion in commercial real estate alone, according to Simonian. $400 billion, he continued, change hands every year, and Realty Mogul wants to take a slice of those transactions, which can result in massive profits.

Why now? The general crowdfunding concept has become familiar enough to consumers for the platforms to be successful. LendingClub, he thinks, did a good job in educating people about peer-to-leer lending, as well as changing the way people think about their investments.

Overall, Simonian thinks crowdfunding (of the accredited and unaccredited varieties) can be a good fit for a number of industries, but not for all: “We’re picking off the attractive verticals, as we’re looking at the space.”

And Simonian sees niche crowdfunding platforms as advantageous over more general ones.

“How do you vet the quality of the deals that come onto your platform?” he asked, rhetorically. “The problem with someone who’s horizontally focused is that there’s no underwriting process. You just can’t build an automated platform to vet these deals, because every deal is so different.”

The crowd plays a part here, too, by helping the platform with the due diligence. If a potential investor lives near a listed property, that person can take a look at it and report back to the other investors, decreasing the chance of the crowd putting money in a bad deal.

There are a number of players in this market and (for the reasons stated above) all have promise. Simonian said Canaan decided to invest specifically in Realty Mogul because it’s already underwritten $15 million, and because of its focus on promoting its brand as a platform that presents quality deals to quality investors, which is important for securing trust among the early adopters. He also spoke highly of Realty Mogul's managment team.

Whether Canaan and its peers are making the right choice by investing in real estate crowdfunding platforms won’t be known for some time. But so many VCs taking an interest in these platforms is certainly a good sign for the industry at large.

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